Competition policy in the UK Monopolies and Efficiency
Your task
Governments have a range of anti-monopoly policies which they can use to improve economic efficiency
In your examination, you will need to evaluate these policies.
The verdict?
It can now be seen that it is not possible to come to any simple conclusions about the desirability of the competition in the market.
Competition is by no means always ‘best’.
On the one hand, monopolists and many
imperfectly competitive firms (Oligopolies) may exploit the
market, earning abnormal profits at the expense of
consumers, reducing output and increasing price. This
leads to welfare loss.
On the other hand, natural monopolies are far more efficient than
any alternative competitive market
structures. There may or may not be a link
between monopoly and innovation.
Measures aimed at enhancing competition
Governments have a range of anti-monopoly policies which they can use to improve economic efficiencyTaxes & subsidiesPrice controlsNationalisationPrivatisation & deregulationBreaking up the monopolistReducing entry barriers
Specification
Evaluate measures aimed at enhancing competition between firms and their impact on prices, output and market structure
Compare and evaluate the strengths and weaknesses of methods of regulation for example price capping, monitoring of prices and performance targets
Explain why governments may intervene to encourage competition, or prevent monopolies and mergers
Be aware of various types of private sector involvement in public sector organisations, including contracting out, competitive tendering and public private partnerships (PPP/PFI)Today’s Lesson
Objectives for this lesson
Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer
Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return
Compare and contrast PPP and PFIExplain the term Regulatory Capture
Introduction to privatisation
Privatisation is the sale of state owned assets to the private sectorSuch industries tend to be natural monopolies with large fixed costs
relative marginal costs, e.. Railways, gas, coal
A number of arguments have been used to justify privatisation including Lower costs of production Increased choice Quality and innovation Wider share ownership Reduction in state borrowing
and debt
Arguments against privatisation include concerns about Monopoly pricing increasing inequalities in society Increasing externalities
Privatised industries can still be monopolies!
Wherever possible, privatisation is also accompanied by measures to encourage competition
Where not possible, or feasible to encourage competition, regulation was seen as the solution
So instead of being under government control they came under government regulation
UK regulators
Each of the privatised industries has its own regulator:
Ofcom – TelecommunicationsOfgem – Gas and electricityOfwat – WaterORR – Rail
Their task is to ensure that no firm is able to abuse what monopoly powers it has to exploit customers
Methods of regulation
Different ways they can achieve this:Increasing competition Prohibiting anti-competitive practicesMonitoring pricing and price cappingSetting minimum investment levelsMonitoring performanceRate of return
Price capping / Price controls
Allow price increase each year at a rate set below the Retail Price Index:
RPI-X (X-inefficiency)The idea being that it forces companies to look
for productivity gains to eliminate x-inefficiencyThe X refers to the amount of productivity gain
that the regulator believes can be achieved, expressed in terms of the change in average costs.
E.g. if the regulator believes that it is possible to achieve productivity
gains of 5% per year, and of the RPI is increasing at a rate of 10% per
year, the max price increase allowed in a year would be 10%-5%=5%
Problem: how does the regulator know at what level to set ‘X’?
The company knows better than the regulator…information asymmetry
Company might reduce quality or neglect investment…
Price capping / Price controls
Force firms to undertake expensive investment:
RPI+K (Capital)K investment to bring up quality of serviceWater: bring standards up to EU level
Firms can keep any profits from efficiency gains that the regulator
has calculated as reasonable. Usually in place for 5 years enabling
firms to plan ahead.
Problem: if the regulator underestimates efficiency gains, then firms can be seen to
make excessive profits, often invested outside of the regulator’s remit.
Performance targets
E.g. railwaysTrains within 5 minutes of
advertised arrivalTrains cancelled
WaterNumber of leaks stopped
Rate of return
The firm is limited on the rate of return it is permitted to make, thereby preventing it from making supernormal profits.
This too may affect the incentive mechanism: the firm may not feel the need to be as efficient as possible, or
it may waste profits on managerial perks to avoid declaring too high a
rate of return
Regulatory capture
A situation in which the industry regulator comes to represent a companies interests rather than the consumer
The regulator becomes so closely involved with the firm it is supposed to regulate that it begins to champion
its cause rather than impose tough rules
Objectives for this lesson
Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer
Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return
Compare and contrast PPP and PFIExplain the term Regulatory Capture
Public Sector – Private sector engagement
Public Sector
Private Sector
Contracting out Competitive tendering
Private sector firms bid for business
Service or Venture
Public Sector – Private sector engagement
Public Sector Private Sector
Public Private Partnership (PPP) A Govt service or private venture is funded and operated
through a partnership
£
Service / Venture
E.g. PFI – Private Finance Initiative (launched in 1992)
The public sector outlines the services it requires
The private sector then delivers by itself or jointly and is allowed to charge a return,
e.g. a toll on a bridge, which is balanced with social welfare
PFI deals signed as at Sept 2001
`
By March 2008 more than 600
projects worth £60bln
N.B. As PFI switches focus toward efficiency and lower
costs –concerns raised over quality of service
Objectives for this lesson
Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer
Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return
Compare and contrast PPP and PFIExplain the term Regulatory Capture